Practice Exam

quick asset ratio (acid test)

(Current Assets - Inventory) / Current Liabilities

As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A sale of stock by an administrator of an estate B) A sale of U.S. Treasury bonds to a retail investor C) A purchase of stock by an accredited investor under Rule 506(b) D) A purchase of bonds by a trustee of an irrevocable trust

A

Individuals who pass the Series 65 exam will be able to tell prospects that A) they passed a 130-question examination in order to qualify as investment adviser representatives. B) their investments will be offered protection by the antifraud statutes of the Uniform Securities Act. C) by passing the exam, they are now registered as investment adviser representatives with the SEC. D) this indicates the regulatory bodies consider them qualified to manage money.

A

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of which of the following? The Securities Exchange Act of 1934 The Investment Company Act of 1940 The Investment Advisers Act of 1940 The Uniform Securities Act A) II and IV B) II, III, and IV C) I and III D) I, II, and III

A

Under the provisions of Regulation SP, a person who has an investment advisory contract with a registered investment adviser is known as A) a customer. B) a consumer. C) a cohort. D) a client.

A

Which of the following activities might result in a positive yield curve in the bond market? A) Investors buying short-term bonds and selling long-term bonds B) A parallel upward shift in interest rates C) Investors buying long-term bonds and selling short-term bonds D) A parallel downward shift in interest rates

A

Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan is permitted to discriminate in favor of highly compensated employees. B) The qualified plan is permitted to discriminate in favor of key employees. C) The nonqualified plan allows for an immediate employer deduction for contributions. D) The qualified plan costs less to administer than the nonqualified plan.

A

With regard to nonqualified stock options (NQSOs) and incentive stock options (ISOs), which of the following statements is not correct? A) Capital gain treatment is available only with NQSOs. B) AMT is an issue only for those exercising ISOs. C) A tax deduction for the employer is generally available only with NQSOs. D) Board of director approval is required for both NQSOs and ISOs.

A

You have a client who is interested in a preferred stock with guaranteed dividends. What is likely the reason for using the term guaranteed? A) Someone other than the issuer has guaranteed the payment of those dividends. B) The issuer has a AAA rating that is tantamount to dividend payments being a sure thing. C) As a fixed income security, the dividends are guaranteed to never increase. D) A previous investment adviser representative has improperly used that term in an effort to make a sale.

A

LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would not cause a decrease in the reported net income? A) Cash dividends B) Corporate income tax rate increase C) Allowance for bad debts D) Year-end bonuses to employees

A Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income

KAPCO, Inc., has 100 million shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) mid-cap stock. B) micro-cap stock. C) large-cap stock. D) small-cap stock.

A Stocks with a market cap in the range of $2 to $10 billion are considered mid cap.

Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. B) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients. C) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter. D) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio.

A When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.

A balance sheet shows that a corporation builds its capital structure with all of the following except A) capital stock. B) cash. C) retained earnings. D) long-term debt.

B

If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) Preferred stock B) Tangible assets C) AAA bonds D) Fixed annuities

B

Which of the following clients of a federal covered investment adviser are not exempt from the delivery requirements of the brochure rule? A) An open-end investment company with less than $25 million in assets B) An employee benefit plan with assets of at least $5 million C) A closed-end investment company traded on the New York Stock Exchange D) An individual investor purchasing the investment adviser's newsletter with an annual subscription price of $410

B

Which of the following forms of joint ownership is most associated with ownership of real estate? A) Totten trust B) Tenancy by the entirety C) Tenants in common D) Joint tenants with right of survivorship

B

Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Sending a renewal notice to the SEC B) Paying the state licensing fee C) Filling out the consent to service of process D) Filling out Form U4

B

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) business risk. B) liquidity risk. C) systematic risk. D) inflation risk.

B

It would be considered an unethical business practice for a state-registered investment adviser to A) deposit marketable securities or cash with the administrator in lieu of a required surety bond. B) claim that advisory fees are negotiable but maintain a fixed fee schedule. C) determine the price or time of execution of customer orders without written discretionary authority. D) notify the administrator that the adviser intends to maintain custody of customer securities.

B If an adviser states that fees are negotiable but charges fixed rates, that would be an unethical business practice

One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) ensure that full disclosure has been made in the adviser's brochure. B) verify that the investment adviser still qualifies for SEC registration. C) provide updated information on those associated persons who are in charge of giving investment advice. D) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian.

B In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million.

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A) ahead of the common stock but after the preferred stock and the bonds. B) ahead of the common stock and the preferred stock but after the bonds. C) behind the bonds, the preferred stock, and the common stock. D) ahead of the common stock, the preferred stock, and the bonds.

B Secured Unsecured Preferred sctock common stock

Which of the following items does not fall within the Section 28(e) safe harbor? A) Proprietary research reports analyzing the performance of a specific industry B) Software used to simplify the investment adviser's preparation of its tax returns C) Software used to analyze clients' portfolios D) Research reports prepared by a third party other than the broker-dealer

B Tax preparation software benefits the adviser but not the client.

An investor has many tax preference items. Computing the investor's income tax using the regular method results in a tax burden of $29,200 while computing the alternative minimum tax (AMT) results in a tax liability of $27,500. Based on this information, the investor's income tax liability for the year is A) $30,900. B) $29,200. C) $56,700. D) $27,500.

B To determine if you owe AMT, you compute both your regular tax and your AMT and pay whichever is the higher amount.

One of your clients has a marginal tax rate of 32%. The 35% tax bracket begins in another $30,000 of income. Should the client receive a bonus of $50,000, the federal income tax due on that would be A) $17,500. B) $16,600. C) $15,600. D) $16,900.

B the first $30,000 of the bonus is taxed at 32%, and the next $20,000 is taxed at the next bracket of 35%. The math is $30,000 times 32% = $9,600. To that we add $20,000 times 35% = $7,000. That gives us a total of $16,600 in tax.

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A) interest at the state's legal rate less any income received on the security. B) the original consideration paid for the security or the current market value, whichever is greater. C) court costs. D) attorney's fees.

B you are entitled to original investment, not current market value

A significant difference between an account for a trust and an account for an estate is A) banks can be named as trustees for a trust but not as an executor. B) only the estate has beneficiaries. C) the trust account will generally be active for a much longer period of time. D) the standard of prudent investing applies to trusts but not to executors.

C

Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A) The expiration date B) The underlying asset C) The premium D) The exercise price

C

The technical market theory that measures the breadth of the market is A) the short-interest theory. B) the support/resistance theory. C) the advance/decline theory. D) the odd-lot theory.

C

When an investment adviser representative (IAR) terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides, A) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly. B) the investment adviser representative and the employing adviser must notify the Administrator promptly. C) only the investment adviser representative must notify the Administrator promptly. D) only the terminating investment adviser must notify the Administrator.

C

A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A) is a federal covered broker-dealer. B) is registered in the state where its principal office is located. C) limits its clientele to employee benefit plans with assets of at least $1 million. D) is a member of the New York Stock Exchange.

C A broker-dealer must be registered in every state in which it sells or offers to sell securities unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required.

All of the following would decrease the U.S. balance of payments deficit except A) an increase in exports of domestic goods from the U.S. B) a decrease in imports of foreign goods into the U.S. C) a decrease in purchases of U.S. securities by foreign investors. D) a decrease in dividend payments by U.S. companies to foreign investors.

C Anything that brings foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S. or investing less in the U.S. will increase the deficit.

Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A) Buy stop B) Buy limit C) Sell stop D) Sell limit

C Sell stop also means "stop loss" buy stop are used on short positions

What is the tax-equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 4.55% B) 20.00% C) 10.77% D) 9.45%

C Tax-equivalent yield = bond rate / (100-tax rate) 7% / (100% - 35%)

Early in the year, an investor purchased 100 shares of KAP common stock for $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) 5.00%. B) 2.00%. C) 3.33%. D) 0.33%.

C Three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 that, when divided by the original cost of $60 per share, results in a total return of 3.33%

A portfolio manager who follows the value style of investing would most likely focus her attention on A) 52-week highs and lows. B) moving averages. C) financial statements. D) market capitalization.

C Value managers look for value as found on the company's financial statements

Prudent Asset Construction Enterprises (PACE) has offices in States X, Y, and Z. On their last annual updating amendment, they reported assets under management (AUM) of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $1,600, paid at the first of each quarter B) $600, paid six or more months in advance C) $1,600, paid one year in advance D) $10,000, paid monthly

C for federal prepaid fees, it's $1,200 six or more months in advance state is $600

A U.S. Treasury bond's price moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A) $1.25. B) $0.40. C) $12.50. D) $4.00.

C the difference between 96.22 and 96.18 represents an increase of 4/32 per bond. That is ⅛, or $1.25, times 10 bonds, or $12.50.

A 46-year-old investor wants to have retirement savings worth $1 million at age 70. If the investor can earn 9%, using the rule of 72, the present value needed today is closest to A) $90,000. B) $250,000. C) $125,000. D) $500,000.

C which one doubles three times?

John was convicted five years ago of failure to pay child support—a misdemeanor in his home state. John would now like to register as an investment adviser representative in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the administrator of the neighboring state A) will determine John's status based upon the extent to which his child support payments are being paid. B) will consider granting registration to John but only if he receives heightened supervision. C) will consider John to be statutorily disqualified since in this state, his crime is a felony. D) will disregard that conviction when determining John's qualifications for registration.

D

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A) the contract should be in writing. B) the initial contract is for a maximum of one year and then may be renewed on either an annual or a biannual basis. C) the fund may not engage in margin trading unless a specific exemption applies. D) no contract may be terminated with more than 60 days' written notice.

D

Under the Uniform Securities Act, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade was being executed by an officer or partner of the firm. B) directing a securities transaction to an affiliated broker-dealer. C) engaging in an agency cross transaction. D) selling shares from its proprietary account to an advisory client.

D

Your client noticed that the listing for the CDL $100 par common stock in the Wall Street Journal indicated that the current yield of the stock was 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $1.00. B) $4.00. C) $1.60. D) $0.40.

D

Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an investment adviser representative (IAR) in which of the following states? A) Daphna would be exempt in State E, where she has no retail clients. B) Daphna would be exempt in States E and F. C) Daphna would have to register in all three states. D) Daphna would be exempt in State F, where she has 227 retail clients

D As an IAR with a federal covered investment adviser, Daphna has to register only in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.

A state-registered investment adviser maintaining custody of customer funds and securities discovers that the firm's net worth is $32,000. Which of the following steps would not be required? A) Reporting to the administrator the number of client accounts being served by the investment adviser B) Notifying the administrator of the deficiency by the close of business on the next business day C) Filing a financial report with the administrator by the close of business on the next business day following notice D) Returning the customer funds and securities within three business days of the discovery

D Once the firm's net worth is below $35,000, notifications and reports must be sent to the administrator. Unless ordered by the administrator, there is no requirement to return client assets to clients.

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) JKL 4s of 2022 B) DEF 6s of 2051 C) GHI 7s of 2052 D) ABC 5s of 2050

D The bond with the longest duration is generally going to have the greatest exposure to interest rate risk.

An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) Zero-coupon bonds B) Cumulative preferred stock C) TIPS bonds D) Insured bank CDs

D The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates

An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A) sell a put on that stock. B) sell a call on that stock. C) buy a call on that stock. D) buy a put on that stock.

D This investor is looking to hedge his risk of loss. The best way to hedge a long position is to buy a put option.

An individual has just received an inheritance of $15,000 and has the goal of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Insured municipal bonds B) Newly issued U.S. Treasury bonds C) Public utility stocks D) Bank-insured CDs

D When preservation of capital is a goal and one of the choices is an insured bank CD, choose that answer.

Upon reaching the age of 72, required minimum distributions (RMDs) must be taken by retired individuals who were participants in all of the following except A) Roth IRAs. B) Keogh plans. C) SEP IRAs. D) traditional IRAs.

a

What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Cash flow B) Dividend payout ratio C) Book value per share D) Working capital

a

As defined in the Uniform Securities Act (USA), the term person would include which of the following? A limited partnership A political subdivision An unincorporated association The executor of an estate for a deceased individual A) I, II, and III B) I, II, III, and IV C) I and IV D) II and III

b

An investment adviser wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisers Act of 1940, A) authorship of the system must be prominently disclosed. B) a statement reflecting the limitations and difficulties of using the system must be included in the ad. C) results obtained by using the system must be shown using a time period of no less than 12 months. D) the advertisement must be filed with the appropriate SRO within 10 business days of first use.

b An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using the system.

The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) coupon rate. B) current yield. C) yield to maturity. D) duration

c

Which of the following is most commonly used when the author wants to express end-of-life wishes? A) A living trust B) A revocable trust C) A living will D) A testamentary trust

c

Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. B) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour, penalty-free withdrawal. C) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. D) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal.

d

When is an investment adviser representative (IAR) required to make disclosure to the client?i i When the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated ii When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale iii When transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client iv When transactions recommended to the client are inconsistent with those for the IAR's own account A) I, II, and III B) I and III C) II, III, and IV D) II and IV

d

When discussing the suitability of investing in direct participation programs, particular attention should be focused on which risks? Legislative Liquidity Market Purchasing power A) III and IV B) I and IV C) II and III D) I and II

d Two of the major risks faced by direct participation program (DPP) investors are the lack of liquidity and the possibility of legislative change.